Kraft seeks to enforce Starbucks contract

Kraft says it rejected $750 million offer from Starbucks

By

MattAndrejczak

SAN FRANCISCO (MarketWatch) — Kraft Foods filed a preliminary injunction in New York federal court Monday to stop Starbucks from trying to “unilaterally” end their 12-year supermarket distribution deal.

The move is the latest step in the month-long public spat, which Kraft
KFT
claims is creating confusion among food retailers it sells Starbucks coffee to and harming its business. In recent weeks, Starbucks
SBUX, +0.12%
has been putting plans in place to sell its bagged coffee directly to supermarket chains.

In its preliminary injunction filed against Starbucks in the U.S. District Court for the Southern District of New York, Kraft said it is trying to stop Starbucks from proceeding as if their strategic partnership has terminated.

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Kraft said the contract is still in force. Under the distribution deal, Starbucks sells its bagged coffee to Kraft and ships it to Kraft warehouses across the United States. Kraft then distributes the coffee to food retailers and handles all sales and marketing strategies, including promotions.

“Instead of executing its rights under the contract to buy back the business, Starbucks has chosen a remarkably aggressive strategy that publicly disparages our achievements, interferes with our customer relations and threatens to harm Kraft,” Marc Firestone, Kraft’s general counsel, said in a statement.

Kraft has been seeking the fair-market value of the business it has helped develop with Starbucks since 1998, plus up to a 35% premium.

On Aug. 9, Kraft said it rejected a $750 million offer from Starbucks during a meeting in Chicago, which included Starbucks Chief Financial Officer Troy Alstead. On Oct. 5, Starbucks alleged breach of contract, and on Nov. 4, publicly announced it was ending its partnership with Kraft.

Kraft last week launched an arbitration proceeding to help settle the dispute. In a statement Monday, Starbucks said “it’s unfortunate that Kraft has chosen to attempt this delaying tactic through seeking a preliminary injunction, a course that will ultimately prove harmful to customers.”

Both sides are likely to hire their own independent appraisers to value the business. If the valuations come within 10% of each other, then the price will be the average of the two.

Analysts estimate the business could be worth more than $1.5 billion.

Appraisers may look to J.M. Smucker’s
SJM, +0.37%
2008 purchase of the Folgers coffee business from Procter & Gamble Co.
PG, +0.35%
as one reference to gauge the worth of the Kraft-Starbucks relationship in the marketplace.

The Kraft-Starbucks business has grown to $500 million in annual sales from $50 million in 1998. Year-to-date, Kraft said the business has grown sales by 8% in the U.S. over 2009.

The contract is set to expire in 2014, but Starbucks has right to terminate the deal. Kraft said the contract calls for a 180-day notice, plus compensation. As the two tangle, Kraft continues to distribute to Starbucks bagged coffee as well as the company’s Seattle’s Best coffee brand.

But Starbucks already is making plans to go alone.

On Dec. 1, Starbucks said it was working with consumer-marketer Acosta to develop sales and product-display strategies for bagged coffee starting on March 1, as well as for the Tazo Tea line at the start of next year.

After a successful two-year turnaround, Starbucks is looking for new growth avenues outside its 16,850-plus coffee shops worldwide. Sales of its bagged and instant coffee drinks inside supermarkets is a key focus.

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